Question

*component of the conceptual framework qualitative characteristic, element, or principle

1. Ordinary operating maintenance on equipment was recorded as follows:

Equipment			2,500
	Accounts Payable				2,500

2. Trimm received an advance on a custom order for merchandise that will be shipped during the next accounting year.

Cash			8,000
	Sales Revenue				8,000

3. Trimm Corporation is holding inventory on consignment for Rubber Ltd. Trimm will only pay Rubber when a sale is made to a customer. Trimm made the following entry when it received the inventory:

Inventory			15,000
	Accounts Payable				15,000

4. On the last day of the accounting period, a 12-month insurance policy was purchased. The insurance coverage is for the next accounting year.

Insurance Expense			4,000
	Cash				4,000

(a1)

For each transaction, determine which component of the conceptual framework (i.e., qualitative characteristic, element, or principle) was violated.

Answer 1

1. Ordinary Operating expense , is a revnue expenditure and it should be booked in PL A/c. In given entry , Ordinary Operating expense are capitalises as equipment is not correct as per accounting Principle.

2.As per Accounting Principle, in Accrual method, income will be booked only whensale made or service rendered/ completed and billed. However, as given in question, income has been booked for amount received from customer aginst supplies in next accounting year.

3. In given Question for purchase of material/inventory , Inventory account has been debited instead of debit the purchase account. It's a charterstic conceptual framwork voilated .

4. As per Accounting Principle, in Accrual method, expenses will be booked only when expenses incurred related with the same accountingn period. However, as given in question, insurance amount paid in advance for next year has been booked as expenses in current year is not correct as per accounting principle.